I dunno, maybe they got a message from some "cows rights" group or something... Microsoft really wants to appeal in India so they're not going to do anything that could potentially hurt their chances.

From I theory I heard on Digg, Microsoft decided to cut their losses. By not releasing the game, they won't lose money in manufacturing, distribution etc. if it ends up banned or boycotted later. Sensible market decision, but more like a nod to piracy amirite.